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Edited Transcript of SITC earnings conference call or presentation 24-Apr-19 1:00pm GMT

Q1 2019 Site Centers Corp Earnings Call

Beachwood Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Site Centers Corp earnings conference call or presentation Wednesday, April 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brandon Day-Anderson

SITE Centers Corp. - Head of IR

* Conor Fennerty

SITE Centers Corp. - SVP of Capital Markets

* David R. Lukes

SITE Centers Corp. - President, CEO & Director

* Matthew L. Ostrower

SITE Centers Corp. - Executive VP, CFO & Treasurer

* Michael A. Makinen

SITE Centers Corp. - Executive VP & COO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Christopher Ronald Lucas

Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst

* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Vince Tibone

Green Street Advisors, Inc. - Analyst of Retail

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to the SITE Centers Reports First Quarter 2019 Operating Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Brandon Day. Please go ahead.

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Brandon Day-Anderson, SITE Centers Corp. - Head of IR [2]

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Good morning, and thank you for joining us. On today's call you will hear from Chief Executive Officer, David Lukes; Chief Operating Officer, Michael Makinen; and Chief Financial Officer, Matthew Ostrower.

Please be aware that certain of our statements today may constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from our forward-looking statements. Additional information about these risks and uncertainties may be found in our earnings press release issued yesterday and in the documents that we filed with the SEC, including our most recent reports on Form 10-K and 10-Q.

In addition, we will be discussing non-GAAP financial measures on today's call, including FFO, Operating FFO, same-store net operating income. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in yesterday's press release. This release and our quarterly financial supplement are available on our website at www.sitecenters.com.

For all of you on the phone who would like to follow along viewing today's presentation, please visit the Events section of our Investor Relations page and sign in to the earnings call webcast.

At this time, it is my pleasure to introduce our Chief Executive Officer, David Lukes.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [3]

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Good morning. I'm thrilled with our first quarter results, which were measurably above our expectations due largely to better-than-expected operations, resulting an increase in our guidance. Most importantly, same-store NOI growth, which is the key driver of our 5-year growth plan we articulated at our October Investor Day, was 2% in 1Q versus our plan for a relatively flat start to the year. Additionally, our leasing team continues to make progress, leasing our 60 anchor opportunities, half of which have now been leased, which will be a key driver of future growth. I haven't felt better about operating prospects since I joined SITE Centers 2 years ago, and I'm equally enthusiastic about delivering on our plan to invest opportunistically.

Our 5-year program calls for $75 million of annual investments funded via capital recycling. During our last conference call, I indicated that we had already achieved our 2019 spending goals through the acquisition of 3 assets from our joint ventures and $50 million of stock repurchases. The acquisitions are already bearing fruit. Executed and improved leasing deals will bring occupancy up from 75% to 88% and will increase ABR by over 22% at the 3 properties in just a few months.

Our ongoing opportunistic focus also resulted in 2 new transactions in the first quarter. First, we signed a management agreement with Crédit Suisse, providing them advisory and operational services for 83 assets leased to Shopko on which they had recently foreclosed. Importantly, the agreement came with rights of first refusal for 10 assets in the portfolio and allowed us to leverage our existing operating platform to generate nearly 100% margin on any fees we received. Crédit Suisse's needs were ultimately short-lived, but we nonetheless earned $1 million in the process, which was a contributor to our strong quarterly results.

This transaction isn't large relative to our enterprise value, but it represents part of SITE Centers' future, leveraging relationships and our operating platform to source opportunities, create value and generate profits. We will continue to seek involvement in situations like this that are a bit contrarian, complex or involve distress, where we can source mispriced assets and make money for our stakeholders.

The second advancement of our opportunistic investment program during the quarter came from the sale of our Vista Village asset near San Diego for an approximate 6% cap rate. This transaction is a case study in how we think about capital deployment. At a high level, Vista Village is attractive, especially in the public markets, given its strong demographics, high ABR per square foot, coastal location and grocery anchor. But our prioritization on returns and IRR means that this property's slow growth profile and attractive exit valuation made it a great recycling candidate.

The sale also highlights the quality of our portfolio. After 2 years of robust asset sales, the cap rates on our remaining portfolio are not surprisingly lower, which increases our ability to grow earnings through capital recycling. We expect to redeploy the proceeds from Vista Village and are now encouraged by growing pipeline of acquisitions candidates that will be accretive to the company's cash flow growth and importantly at a positive investments thread and accretive to earnings. We are highly focused on sustainable earnings. And given our high cost of capital, I feel confident we'll be able to find something exciting in 2019 to acquire.

Lastly, we're also making progress on our redevelopment plans, the third component of our 5-year growth strategy. Work continues on 3 active projects following the completion of West Bay Plaza this quarter, which came in 8% under budget and a quarter early. And we are advancing the entitlement process for our pipeline projects in Atlanta, D.C. and Boston.

Importantly, while we continue to weigh a range of options and site plans for these properties, dilution from all these projects is already in our numbers, so there's only upside from the ongoing ramp of our redevelopment activities.

And with that, I'll call -- hand the call over to Mike to discuss our operating results.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [4]

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Thank you, David. I'm very pleased with our reported 2% same-store NOI growth in the quarter, which was ahead of plan due to several earlier-than-expected rent commencements, higher-than-expected overage rent and lower bad debt. The first quarter saw more of the robust leasing activity that we've seen over the last 24 months with high volumes despite our now more focused portfolio.

We have now signed half of the 60 anchor leases identified at Investor Day with another 15 in advanced stages. This compares to 15 executed leases in October, when we first announced this call, and 23 at the end of the fourth quarter. These 45 deals represent a blended 37% leasing spread with 33 different brands. Noteworthy deals this quarter include: Burlington at Nassau Park Pavilion, which completes the backfill of the former Kohl's box; Five Below at Terrell Plaza in San Antonio; and 24 Hour Fitness at FlatAcres Marketplace in Parker, Colorado. All of this leasing activity has generated an increase in our pro rata portfolio lease rate to 93% with a 360 basis point spread to our commence rate of 89.4%, which is almost 150 basis points higher than our average spread in 2018.

Leasing spreads for the quarter were solid with new leases of 23% and blended spreads of 10.7%. Importantly, these metrics are at or above trailing 12-month trends, which we believe is the best way to look at our operating metrics, given our now smaller portfolio and consequently more volatile quarterly metrics. Net effective rents, an indicator of the overall economics of the leases we're signing, were also in line with our trailing 12-month numbers as we continue to lease space at compelling economics.

We remain confident in our ability to continue driving shop leasing and to achieve the 94% shop goal we articulated as part of our 5-year plan. To that end, our shop lease rate rose this quarter to 89.4% after a dip in Q4 that was largely attributable to transaction activity.

The final liquidation of Payless and Gymboree in the second quarter along with additional tenant bankruptcies remain risks to shop occupancy, but our lease volumes remained elevated, and I'm encouraged with the team's momentum. Overall, tenant demand remained high across our portfolio, given the superior quality of our assets in the top quartile of the country's retail landscape, and we continue to expect anchor rent commencements in the back of the year to be significant driver of growth in 2019 and 2020.

With that, I'll hand the call over to Matt.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [5]

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Thanks, Mike. I'll first comment on our balance sheet and then I'll touch on some earnings matters, including how the new lease accounting standard has affected our financial statements, and I'll close with some comments on guidance.

First, on the balance sheet, our position remains strong with an incremental decline in pro rata debt to EBITDA in the quarter to 5.5x, driven by our strong operations and the recent closing of the Vista Village asset sale. We are happy with current leverage and pleased to put the dilutive asset sales process behind us in order to focus on driving FFO and NAV per share growth.

Beyond improved leverage, our maturities are also in great shape with the weighted average consolidated term of 6 years.

As David mentioned, we expect to deploy capital during the year, but the impact of this spending will be mitigated over time by 3 factors: First, the ongoing rent and our EBITDA primarily from the growth in same-store NOI; second, the ongoing repayment of our $170 million Blackstone preferred as that JV continues to liquidate. We received $12 million of repayments of this preferred in the first quarter of 2019 and payment of $75 million throughout all 2018. And finally, over a longer time period, we expect to receive $234 million of total capital through the liquidation of RVI and the related repayment of our receivable and preferred investment in that company. All this means we continue to see 6x debt-to-EBITDA as a long-term leverage maximum rather than a goal to work towards.

I'd like to now comment on several accounting and earnings matters. First, our financial statements reflect the adoption of the new lease accounting standard, otherwise known as ASC 842. While our bottom line will not change much, there are some impacts in the standard to our income statement's presentation. First among these is the change in the presentation of bad debt, which is now included as a deduction to rental income rather than as an operating expense previously. In the quarter, this means a reduction of revenues of $441,000. We are unable to restate prior periods. So year-over-year comparison of GAAP revenue and expense line items will be made more challenging. While we are constrained in how we present the GAAP income statement, we have provided footnotes in our supplement highlighting and reconciling these changes. We also have additional details on Page 9 of our earnings slide presentation.

A second change to the income statement is how we account for real estate taxes paid directly by our tenants to local taxing authorities. This expense had previously appeared as both an operating expense as well as recovery income at 100% rate. The new standard mandates omission of this expense and recovery from our own financials, which means reduction of both revenue and expenses by the same amount and a subsequent reduction in our reported recovery rate by approximately 1% in the first quarter. The bad debt and property tax expense presentation changes had no impacts on GAAP net income, EBITDA, FFO, OFFO or net operating income.

I'd like to now highlight several additional earnings considerations that will affect the progression of OFFO in 2019. First, we recognized approximately $10 million of fees from RVI during the quarter. Roughly $7 million of this consisted of recurring assets and property management fees, which we include in both NAREIT FFO and operating FFO. We also recognized $1.1 million of disposition fees and a $1.8 million fee from the recently completed refinancing of the $900 million RVI mortgage. Both of these amounts or roughly $2.9 million were included in NAREIT FFO but excluded from OFFO.

Second, you'll notice we recognized $2.6 million in the lease termination fees in the first quarter. We had budgeted these fees, and we'll obviously lose the income from the tenants from 2Q onwards, but we are excited to re-lease the spaces with more dynamic tenants at a positive mark-to-market. Third, as you update your earnings models, please keep in mind that our first quarter included roughly $250,000 of revenue from Gymboree and Payless stores that have since closed and are no longer paying rent.

Finally, I would like to remind you that percentage rent is seasonal in our business with larger contribution from the first and fourth quarters. All of these items, the lease termination fees, bankruptcy liquidation and seasonality of percentage rent should contribute to a deceleration of OFFO from the first to the second quarter of 2019.

Turning to our guidance update. We have increased our OFFO expectations by $0.01 at the midpoint and increased our expected same-store NOI growth by 25 basis points at the bottom end of the range. This is a product of our better-than-expected first quarter operating results tempered by ongoing caution about potential tenant bankruptcies throughout the remainder of the year.

As we have previously noted, the $1 million decline in 2019 RVI fee income forecast resulting from year-to-date disposition has been offset by a $1 million decline in our 2019 G&A forecast as well. We expect any additional reductions in the RVI fee forecast to be offset by G&A reductions throughout the remainder of 2019. Please recall from our previous commentary that we expect G&A to decline by a lower amount than fees in 2020.

Finally, we have increased our expectations for 2019 JV fees by $1 million to reflect better performance. The increase in reported fees from the fourth quarter was related to the Crédit Suisse deal that David outlined as well as the full quarter of the China dividend trust joint venture. We expect JV fees to decline over the course of the year as Blackstone joint venture sells down its remaining 19 properties.

To summarize, we expect a decline in OFFO from the first to the second quarter. We also expect store closings to cause a deceleration in same-store net operating income in the second and third quarters. That said, we're encouraged by our leasing momentum to date and continue to expect an acceleration in fourth quarter same-store NOI growth, fueled by anchor rent commencements.

With that, I will hand the call back to David for some closing comments.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [6]

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Thank you, Matt. In conclusion, the last 6 months provide increasing evidence of this organization's ability to pivot to growth. We are now demonstrably ahead of schedule in executing on the operational opportunistic investing and redevelopment goals that underlie our plan to produce average 5% OFFO and NAV growth over the next 5 years.

Operator, we're now willing and ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [2]

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So just the first question, Matt, I just want to make sure I heard correctly and just get your take. The Gymboree and Payless, the impact in the first quarter that will not recur, I think you guys say it was $250,000. Is there anything additional -- like as far as all the headline announcements we've seen for bankruptcies, et cetera, is there anything additional that's coming out of your numbers for this year in addition to that, I think you guys said $250,000?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [3]

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In terms of headlines, there's nothing that we are aware of yet. The $250,000 is correct. That's what I mentioned in my prepared remarks for Gymboree and Payless. That number is correct. Keep in mind that we did have the lease term fees that you know we're losing some revenue associated with those tenants going forward. And then, of course, we're budgeting at the high and lower end of the range, different numbers for potential future bankruptcies that we do think will actually occur throughout the remainder of the year, but nothing that has been announced.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [4]

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Okay. And what was the NOI associated with those lease terms?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [5]

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About $300,000 annually.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [6]

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Okay. And then the second question is, going -- on your first earnings -- sorry, the fourth quarter call, you guys mentioned one of the risks to this year was just getting the local approvals and all of the things necessary to get those anchor leases opened for later in the year. Just want to see how you guys are trending on this? You guys, you have leased now 29, up from 23 before. But as far as your ability to get these stores open later in the year, is that still an open-end risk? Or you guys feel more comfortable that you'll -- everything will be in place that you'll have -- I don't know what number you're anticipating having, but having a certain amount and maybe you can articulate that open for this year?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [7]

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Alex, this is David. I think it is an open risk still, but we're also fairly confident that we're proceeding according to budget. So I think, if you want to take the theme that we have internally here that our budget feels accurate, our assets are in pretty high income areas, which usually means permitting and entitlements becomes more difficult, but our construction group has been working pretty diligently as we've been signing anchor leases. And it's still an open item, but we're feeling fairly positive.

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Operator [8]

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Our next question comes from Rich Hill with Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [9]

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I appreciate the color on maybe some on the deceleration from 1Q to 2Q. Maybe you could give us just a little bit of color about how much lease termination income benefited same-store NOI in 1Q, just to give us maybe a sense as to what we could expect in 2Q once those are seasonally off the table?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [10]

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There's no -- that doesn't really hit our same-store NOI, Rich, the way you're describing it.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [11]

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Okay. Well, let me ask it maybe a different way then. Given that same-store NOI is expected to decelerate, you obviously put up 2% in the first quarter. You've raised the low end of the guidance, which I appreciate. You guys seem pretty bullish. Why not raise guidance even more than you did?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [12]

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Rich, it's David. I think it's because we're only at the end of the first quarter, and there's a lot of runway left. There's still some headlines over tenants potentially closing stores. So we're bullish on all of the good news, but we're also fairly cognizant of the fact that there is some bad news out there. So we're remaining cautiously optimistic.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [13]

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Got it. And then look, I think in prior earnings call, there has been some focus on CapEx spend, and it looks like CapEx spend was actually came down somewhat meaningfully this quarter, despite even as leasing spreads improved pretty significantly. How are you thinking about that? Are you seeing tenants demand less CapEx spend? I mean, you're obviously pretty active. So any color around new leases relative to CapEx spend would be helpful.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [14]

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Sure. That is an excellent question. I think that goes to the heart of how we're allocating capital right now. Our highest return on capital is leasing CapEx. We have great real estate. We've got great vacancies that we have to work with, the inventory is strong, but it's expensive. So if you're seeing a quarter-to-quarter bump around, I wouldn't read too much into that because the company is so much smaller now, it's hard to read quarter-to-quarter. I think you should expect that our leasing CapEx will remain elevated as long as we have high-quality vacancies left. Matt, I don't know if you have anything to add.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [15]

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No, yes. I mean, I think you will see volatility. If the bankruptcy picture gets a lot better and we see a lot fewer bankruptcies over the course of the 12- to 24-month period, then our CapEx will come down. Simple as that.

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Operator [16]

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Our next question comes from Christine McElroy with Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [17]

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Just with 2018 having been a relatively good year in terms of leasing volume, new demand for sales has held up well, rent spreads have held up well. Just as we progress into 2019, the overall retail environment has shifted a bit. Retail sales momentum has slowed. There's been more pressure on retailer margins. David, you just commented that you continue to remain cautious given what's out there. Have you seen any impact at all in your leasing discussions from the shift in the environment? Any early changes in tone with regard to retailers committing to new space?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [18]

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I'll ask Mike to comment in a second, but I don't think we've seen any noteworthy change in tenant conversations. We're dealing with a much smaller amount of inventory right now in pretty high-income trade areas, and those are always desirable from tenants. We have ICSC coming up in a couple of weeks. So we'll probably get a little bit more information just because there's a lot of dialogue over a couple of day period. But I think the only thing that you could really point to it when the occupancy and the robust nature of leasing goes on for a long period of time, which it has, I think a landlord needs to be very careful about mark-to-market. And to the point circling back to our Vista Village disposition this quarter, sometimes you end up with a property that has a very high occupancy, but it's also got a mark-to-market that we don't feel confident about. And so to me, that's a more important issue than changes in the demand from the tenants. Mike?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [19]

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Right. The only thing I would add to what David just said is the fact that, in general, the tenants that are expanding aggressively right now, the tone and the overall conversation we're having with them hasn't really changed over the last several years. They are very eager to get stores open because that's what's driving their business. And the overall conversations we're having candidly haven't changed that much over the last several years.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [20]

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And just to circle back a little bit, just to remind you, in the prepared remarks, Christy, we talked about 33 brands with 45 spaces, right? So the demand remains at least on the margin. Our incremental activity continues to show diversity of demand in a high level so.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [21]

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Okay. And then just following up on the Crédit Suisse-Shopko deal, David, you mentioned in your opening remarks, potentially seeking out other distressed opportunities like this. How are you sourcing these types of deals? And is this more sort of one-off opportunistic? Or could this become a more sizable platform for you?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [22]

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Yes, I don't envision this type of transaction being programmatic. I think it really is opportunistic. We've done an awful lot of financing with Crédit Suisse. Conor had a great relationship with the folks there. And I think we were able to move very quickly to help them out of a situation where they needed some immediate assistance, and it gave us the opportunity to look under the hood and a bunch of assets and get ROFRs on 10 properties that we thought might be acquisition opportunities. They turned out not to be. But I think from a conceptual standpoint, we're very eager to jump into distressed situations where we can get an early read before the book is published, look under the hood, we can really start to look at some assets and our leasing folks can decide whether there is an opportunity to buy some properties. So it didn't work out with us buying properties, but we basically got paid along the way pretty well to do the homework.

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Operator [23]

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Our next question comes from Jeff Donnelly with Wells Fargo.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [24]

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Matt, thanks for providing the bridge from your Q1 FFO to your annual guidance. I think all the items that you delineated account for about $0.03 a share of deceleration in your quarterly numbers, and I'm just curious, what would and which just still put you towards the top end of your annual guidance. I guess, what would need to come to pass to push you towards the low end?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [25]

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Well, you're just simply taking some things out of the first quarter, which I understand the math of what you're doing. But keep in mind we are talking about a further deceleration, right, particularly in the fee side of the equation, right, as Blackstone continues to liquidate. So -- and again, we have a range, right, and so we're just building in a variety of scenarios, some were positive at the top end and some were negative at the bottom. A lot of this would have to do with what happens with bankruptcies.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [26]

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And maybe one other questions is how is your outlook for bad debt or credit loss in your updated guidance compared to what your assumption was in your initial guidance? Has that changed at all?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [27]

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No, no, not really.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [28]

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And maybe one last one for you guys is, how is the tenant appetite for CapEx expenditures evolved. Are you seeing a stronger preference from retailers to use landlord funds for their stores? Or does it seem pretty constant over time?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [29]

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It's funny to say it's constant over time. There are 2 notable changes maybe over the last 5 years. One is that construction cost in certain markets has accelerated, labor in particular and some raw materials, and so that has had some impact. But remember, when a tenant opens their prototype, they have a work letter. And the work letter has a description of exactly what finishes and materials and fit out they have. So it's difficult for a tenant to start requesting a significantly more amount of capital when we have the work letter and we know exactly what the store is going to be built. So it really has to do with labor materials. But that's not -- I wouldn't say that's a number that's going to surprise anybody. The real CapEx cost is when you have to reconfigure the size of the space. And so when we do box splits or we do any other reconfiguration that's usually when the costs come in higher, what's offsetting that is that the rents are higher. So I think you see elevated CapEx robustness, but you're also seeing a much larger leasing spread. So I think the return profile is very similar.

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Operator [30]

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Our next question comes from Collin Mings with Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [31]

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Just as it relates to your comments on redeploying the proceeds from Vista Village, can you maybe just expand upon the comments about the growing pipeline of acquisition opportunities you're seeing? And then just along those lines, discuss the type of opportunities you're most focused on right now just given your emphasis on growth.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [32]

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Sure. Well it's certainly part of the business we're most excited about, I mean, we're in a great position balance sheet wise. We have plenty of time to be out there trying to source deals. And I guess, if I could put it distinctly, I would say that our acquisition strategy we've defined as opportunistic, but I think that's simply because we think there are assets in the retail world that are mispriced, and we very much are looking for mispriced opportunities because we can generate higher risk-adjusted returns. It doesn't mean that we're not focused. Our focus and our discipline is starting with 2 different attributes. One is that we believe that strong communities are an important feature and they have to be the first filter in an acquisition strategy. The second is that the property within the strong community has to be convenient, convenient to the big part of our leasing culture, understanding which tenants drive their sales from convenience. And if we use those 2 components as the departure point, then from then on, it's really a matter of measuring risk-adjusted returns. As excited as we are, we're not in a great hurry to increase AUM for the sake of growth, but we are very aggressive right now in seeking growth assets where we can use this operating platform to grow FFO.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [33]

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Okay. And then maybe just along those lines, with the rights you have as part of the Crédit Suisse agreement, which, again, seemingly that would lead to potential opportunistic deals where there may be a recurring theme on why none of those deals made sense to you?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [34]

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Yes, the primary component was that the entire portfolio was sold.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [35]

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Okay. Fair enough.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [36]

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Yes. Look, I think that we're agnostic to the format. It could be big box, it could be multiple box, could be unanchored, could be community anchored, could be grocery anchored. I think we're really looking for assets where we can buy growth and use our operating platform. And that gives us a lot of flexibility because I don't think we're backed into a corner other than strong communities, convenience to customers and a great risk-adjusted return.

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Operator [37]

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Our next question comes from Samir Khanal with Evercore ISI.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [38]

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David, you guys did the venture with the Chinese institutional partner. I guess, what's the appetite at this time to do more these types of JVs with the same or potential partners now that sort of time has passed and fits to the JV and perhaps there's been some stability, it sounds like, in pricing for these larger open-air centers or power centers if you call them.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [39]

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Well, I think -- I'm assuming when you say what's the appetite, you mean from our side or from a partner, a capital partner side.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [40]

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I guess both sides.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [41]

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I mean, from our side we really look at the joint venture business as having to have a purpose. One purpose is to allow us to buy things that we maybe couldn't buy without a partner, and the second is to be able to recycle stable, slow-growing assets, recycle that capital and use our platform to go buy growth assets. So our appetite to continue to do recycling joint ventures as long as we believe in the properties and it's a good capital partner, I think our desire is fairly strong. From the capital side, we have been back to Asia and have met with a number of relationships and have talked about the deal that we got done in December, and we would hope to be able to continue to source great future partners that have long-term sources of capital and are looking for consistent dividend returns.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [42]

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Okay. And I guess my second question is around your leasing spreads. I mean, despite all the closures that we've had, it's been pretty impressive when you look at the numbers where the renewals have kind of fairly stayed constant over the last several quarters at this kind of high single-digit range. Do you think that will continue to be the case as we kind of get more headwinds as you've talked about potentially from other closures here?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [43]

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Samir, this is Mike. To answer that, I think, we do expect to continue. As I mentioned in my prepared comments, we're seeing an anticipated 37% cumulative leasing spread for the overall group of anchor tenants that we're backfilling based on both the ones we've executed as well as the ones that are in progress. And one of the things that we're seeing here, as was also mentioned, among that group of 45 deals, there's 33 different tenants. And in many cases, we're seeing tenants vying for the same space. And when they're vying for the same space, it basically becomes a bidding war on the tenant side, and we've had many conversations debating which tenant to go with and we end up basically wearing them out and they end up getting into a little bit of a trade war to go after space and it results in great rent. And so we've seen a lot of that and so therefore, we do anticipate it to continue.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [44]

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The only thing I would add from the numbers side, Samir, is that just remember the portfolio we acquired is small. Now you're -- these numbers are going to get more volatile. We're going to keep focusing people on the trailing 12-month number because I know over the next 2 or 3 quarters, you're going to see a little leasing spread and the question is you extrapolate from that number. And at this point, we're always worried about new supply on the market, whether it's shadow or otherwise, but at this point, we don't see any reason to extrapolate from a little bit of the volatility in the numbers.

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Operator [45]

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Our next question comes from Derek Johnston with Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [46]

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The commenced rate declined by more than suggested from the Toys impact. And could you talk about what else may have impacted that?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [47]

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I don't know. I don't know the answer to that.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [48]

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And I don't think outside of seasonality, I don't think there's anything material.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [49]

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It did surprise us, but I guess I'll put it that way.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [50]

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Okay. And then what annual escalators are you guys able to work into new and renewed leases?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [51]

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It really depends on the lease. I mean, I would say that the majority of anchor leases are still consistent with history, which are flat for 5 years and then there's a bump and the escalators in shop leases really depend on the submarket. It can be anywhere from 2%, 3%, 4%, but it's somewhere in that range. It really depends on the lease.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [52]

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And I guess lastly and just quickly, how competitive has the bidding process been for the recent acquisitions, especially for the highest-quality assets that you guys are probably looking at?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [53]

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That's a really good question. I think the assets we've been looking at generally don't have a significant amount of competition since we've been looking at opportunistic purchases that are a little bit more value-add oriented. But again, we haven't closed any deals in the last quarter. So it's hard to make a comment on that. I still think that there is a pretty strong demand for Tier 1 cities and coastal assets. And the debt markets right now are wide open, and so I think you are still seeing a fair amount of demand from most asset types.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [54]

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Yes. I just want to get into -- totally, just to be clear, we are not going trophy asset hunting, right? This is not the traditional let's just improve the portfolio quality through the recycling process and the kind of the top-down way whether it's demographics or ABRs that people tend to look at. We are -- David's point about opportunism is about balancing risk and reward and more importantly, driving for growth and returns, right? We have a high cost of capital, buying a coastal grocery anchored center at a forecast is really not what we see is the right use of our capital at this point. So we do -- we think quality can be much more broadly defined than maybe the traditional definition, but we are not -- this is not just a trophy acquisitions program.

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Operator [55]

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Our next question comes from Vince Tibone with Green Street Advisors.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [56]

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You identified the 60 anchor leasing opportunities in October and have made a lot of progress against that goal. What I'm trying to get a sense of is how many additional bankruptcies have taken place, let's say, over the last 6 months since that October, like what is the normal amount of tenant churn that we should expect outside of major bankruptcy activity?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [57]

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Major tenant churn?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [58]

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You're asking how much did we add to the 60 since we announced that. Is that basically your question?

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [59]

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Exactly. Yes.

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [60]

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Very little is the answer. There may be one or 2. Certainly from a bankruptcy perspective, if you kind of think about what's happened since the Investor Day, there's been very little anchor bankruptcy activity. We obviously have a couple names that are on our radar. I'm sure you have them on your radar too. So that could change going forward. Again, when you think about a 5-year same-store NOI growth forecast of 2.5% -- 2.75% rather, we built a 150 basis point credit loss reserve into that number precisely because we believe we will be adding to the 60. Our forecast incorporate that possibility. Our numbers this year, our forecast this year assume there will be some of that, but as of right now nothing has actually happened.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [61]

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Got it. That's helpful. My next question is on leasing activity. It looks just over the last few quarters, only roughly 30% of new leases were comparable. I was just trying to get a little more color there to understand kind of what's the most common reason these leases aren't comparable? And is there any way we can think about the economics behind these leases, whether it's CapEx or spreads or just how we can better think about this pretty big pool of leases?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [62]

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I'll hand that over to Conor.

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Conor Fennerty, SITE Centers Corp. - SVP of Capital Markets [63]

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Yes. So Vince, so the comparable pools, everything 12 months or less from the tenant move out. So as David and Mike have mentioned a couple of times, we've had a renewed focus on some spaces being vacant for longer than 12 months. It also excludes the redevelopment assets. If we were to include those, the spread will be significantly higher.

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Vince Tibone, Green Street Advisors, Inc. - Analyst of Retail [64]

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Got it. Okay. So overall, those actually might have better spreads on all than even the comparable leases?

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Conor Fennerty, SITE Centers Corp. - SVP of Capital Markets [65]

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Yes. So as Mike mentioned, the 37% comp on the 45 deals, that includes some of the redevelopment assets, which would not be included in that comparable pool.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [66]

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Our goal has been to just to be consistent in our presentation here. Obviously, the numbers could look higher if we broaden that pool.

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Operator [67]

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Our next question comes from Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [68]

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Just in terms of thinking about fee income coming in, can you talk a little bit about Puerto Rico and just kind of how the for sale market has evolved over the course of the past year or so there?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [69]

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I thought we would make it through the call without a Puerto Rico question.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [70]

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Sorry.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [71]

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That's okay. No, I think the only thing I have to add, as you know, we have a kind of predetermined policy to not comment on RVI transactions only because we're always out in the market and we're usually negotiating with multiple parties at the same time. So we handle the communication from the RVI sales, including Puerto Rico, through press releases once a transaction takes place. From operations perspective, we've spent a good amount of time in Puerto Rico, and I feel like we're making progress. But I don't really have much to add on the transaction side.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [72]

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Got it. Okay. And then maybe sticking with transactions, the 6% cap rate on the assets that you've sold this quarter, I mean, how much -- how would you think of that in terms of being comparable to the remaining, I guess, portfolio quality of SITE? I mean, would you say that's an atypical cap rate on the low side, that's why you flagged it? Or was it being flagged because you think it's a little bit more, I guess, relevant for what you own today?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [73]

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I think I've been pretty clear that we went through the trouble and drama of creating a much smaller company through spinning up RVI. So you could assume that we're happy with the durability and the growth profile of the assets we have left. From a cap rate perspective, I just don't feel confident describing cap rates across an entire portfolio since we just have such a wide collection of assets. This one happened to be a property that we thought was at the peak of its NOI story, and there was a buyer that very much wanted to own the asset, a local buyer. And so when that happens, usually you're able to strike a pretty good deal. So we're happy with recycling that cash flow into other some asset in the future.

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Operator [74]

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Our next question comes from Chris Lucas with Capital One.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [75]

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Appreciate all the color this morning. I guess, just a little bit on the anchor side. David, could you maybe provide some additional color on where negotiations might be for some of the boxes that remain in terms of where -- what sort of activity you're seeing and what expectations might be for finalizing leases before the end of the year on the sort of the remaining bucket?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [76]

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Sure. Let me -- Mike can follow up on that.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [77]

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Yes, in general, as mentioned, we're at 15 additional leases in advanced stages and great economics, and we're feeling very confident about that, and we've got quite a bit of initial conversations on the balance.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [78]

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If I could add a little bit of color, the reality is the reason you're sensing enthusiasm from this management team is that the demand side of the equation is very healthy. A lot of brands are looking for space in the markets where we have vacancy, we have opportunities. And the supply and demand has tilted in the favor of the landlord, there's no question. The angst around budgets for the next couple of years really have to do with bankruptcies. So the front door is active. It's the back door that I think we're all concerned about, and that's why you're probably feeling that some conservatism is really based on the bankruptcy portfolio, not on the demand side.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [79]

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Okay. Great. And then, I guess, on the expectations for boxes that should see commencement later this year, are there any -- what I would call unique circumstances, whether it's a box split or change of use or something like that, that might delay or is it mostly straightforward kind of simple backfilling?

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [80]

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I would say it's generally very straightforward. There are some box splits, but we're on task, and I think we're in good shape.

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Christopher Ronald Lucas, Capital One Securities, Inc., Research Division - Senior VP & Lead Equity Research Analyst [81]

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Okay. Great. And then, I guess, just on the last question for me. Just on the Vista Village disposition, was there any changes to sort of the interested buyer pool for that? You mentioned there was a local buyer that wanted it. But was it fully marketed? How did that transaction go down? Are you seeing sort of different capital pools available today than, say, maybe a year or 2 ago?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [82]

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It was a fully marketed deal. We decided to sell that property when we really achieved an occupancy level that we're happy with and felt like the rent profile didn't have the growth of the remainder of our portfolio. So it was marketed, and I don't think the buyer pool is any different than you would have seen over the last couple of years. I mean, the deal size was kind of mid-range. So we had a lot of people looking at the property, and I think we had a pretty healthy bidder pool.

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Operator [83]

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Our next question comes from Wes Golladay with RBC.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [84]

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What's the accelerated anchor leasing? How should we think about CapEx maybe moderating in the out years looking at 2020, 2021? And then maybe can you comment on the CapEx intensity of the anticipated bankruptcies?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [85]

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Sorry. Wes, I missed your question there.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [86]

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Well, I still think that leasing CapEx is very much tied to occupancy gains. So as long as we're leasing anchors, you're going to see our CapEx remain elevated. And so I think if you're looking at your models, and you're thinking however long it takes us to lease these 60 boxes, that's probably the duration of the elevated CapEx, unless there's more bankruptcies that grows that pot of existing anchor vacancies.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [87]

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Okay. So maybe you're halfway there now assuming a similar pace. I guess, the timing from signing the lease to actually deploying the capital would maybe 2021 look like potentially a peak, assuming a normal anchor environment?

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Matthew L. Ostrower, SITE Centers Corp. - Executive VP, CFO & Treasurer [88]

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Yes. I mean, to be honest with you, we don't really run the numbers the way you're talking about them, right? We don't really run a scenario. We say, okay, bankruptcies are done. We are assuming that we just add to the 60 over the course of this year. That's why we have a bottom and top end of the range. So definitely, if bankruptcies stop today, you would see CapEx continue through 2020 to a very large extent. And then I think you're right conceptually, it should drop off in 2021. We should be so lucky that, that's exactly what happened. So that's certainly not our base case.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [89]

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Okay. Fantastic. And then maybe can you comment on how you guys look at the dispositions versus acquisitions? Is it mainly an IRR? Or is it NPV? I mean, what's the main framework there and how different is it? What you're looking at buying versus what you sold in the quarter?

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [90]

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Well, there's no question we're focused on the present value of the future cash flows, which is really also an IRR analysis. But because we have an infinite hold period, I would say we're more concerned with the cash flow from the property over time. And if we think a property has a low cash flow due to slow growth and high CapEx, then it's a better candidate for recycling. And it's something that we think as higher growth. We're very, very much returns driven right now in our allocation of capital and in our dispositions program.

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Michael A. Makinen, SITE Centers Corp. - Executive VP & COO [91]

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I mean, when you have 68 assets, it's really easy for us to kind of run an IRR assuming outgoing what were the cap rates today for these assets. You can run an IRR on all these assets. And then with 68, we have a pretty granular sense for what the risk of all those assets is. So the constant conversation internally is what is the reward of this asset and what's the -- what are the granular risks. And we kind of take the least attractive trade-off there and recycle that money.

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Operator [92]

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This concludes our question-and-answer session. I would like to turn the conference back over to David Lukes for any closing remarks.

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David R. Lukes, SITE Centers Corp. - President, CEO & Director [93]

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Thank you all very much for your time, and we'll speak with you next quarter.

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Operator [94]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.